"On the other hand, this completely destroys the premise of HTTPS that you have an encrypted connection
to the website you are visiting."
Yes, you do. You are visiting a website that CloudFlare is serving, and you have encryption to that.
Other replies have already gone into how HTTPS never guaranteed anything about what happened after that, but I think that's the wrong POV. What HTTPS guarantees is that one of the central certificate authorities have authenticated that the entity they have granted the cert to is indeed that entity, and the entity can then do whatever they please with that certificate. (Which may be wrong, in which case you have already lost.)
If the entity chooses to grant CloudFlare the authority to speak in their name, then it is a statement on their part that they trust CloudFlare to do so. It is not particularly different than any other bit of internal traffic. It is and always has been the responsibility of the certificate-owning entity to decide what to do with their certificate.
This isn't new. This isn't even remotely new. The concept of allowing designated others to speak in someone's name is ancient, and even in the SSL world it has been going on forever. How many HTTPS sites are being served by Amazon or Rackspace or Linode, which are all technically capable of intercepting the plaintext request at will, or forging the response, or just plain stealing the certificate? It's bizarre to me to see people flipping out as if CloudFlare is doing something new, when it isn't new in the slightest. HTTPS has never been an assertion that the certificate holder is the only participant in the transaction. It has always been a statement of trust by the cert holder that everyone involved in the transaction is trustworthy, and it has always been the case that that statement could be in error, and it has always been the case that if that is so, you've already lost anyhow.